Freddie Mac 2012 Annual Report Download - page 26

Single-Family PC Trust Documents
We establish trusts for all of our issued PCs pursuant to our PC master trust agreement. In accordance with the terms of
our PC trust documents, we have the option, and in some instances the requirement, to remove specified mortgage loans from
the applicable trust. To remove these loans, we pay the trust an amount equal to the current UPB of the mortgage, less any
outstanding advances of principal that have been distributed to PC holders. Our payments to the trust are distributed to the
PC holders at the next scheduled payment date.
We have the option to remove a mortgage loan from a PC trust under certain circumstances to resolve an existing or
impending delinquency or default. Since 2010, our practice generally has been to remove substantially all single-family
mortgage loans that are 120 days or more delinquent from our issued PCs. From time to time, we reevaluate our practice of
removing delinquent loans from PCs and alter it if circumstances warrant.
We are required to remove a mortgage loan (or, in some cases, substitute a comparable mortgage loan) from a PC trust
in the following situations:
• if a court of competent jurisdiction or a federal government agency, duly authorized to oversee or regulate our
mortgage purchase business, determines that our purchase of the mortgage was unauthorized and a cure is not
practicable without unreasonable effort or expense, or if such a court or government agency requires us to repurchase
the mortgage;
• if a borrower exercises its option to convert the interest rate from an adjustable-rate to a fixed-rate on a convertible
ARM; and
• in the case of balloon-reset loans, shortly before the mortgage reaches its scheduled balloon-reset date.
The To Be Announced Market
Because our fixed-rate single-family PCs are considered to be homogeneous, and are issued in high volume and are
highly liquid, they generally trade on a “generic” basis by PC coupon rate, also referred to as trading in the TBA market. A
TBA trade in Freddie Mac securities represents a contract for the purchase or sale of PCs to be delivered at a future date;
however, the specific PCs that will be delivered to fulfill the trade obligation, and thus the specific characteristics of the
mortgages underlying those PCs, are not known (i.e.,“announced”) at the time of the trade, but only shortly before the trade
is settled. The use of the TBA market increases the liquidity of mortgage investments and improves the distribution of
investment capital available for residential mortgage financing, thereby helping us to accomplish our statutory mission. The
Securities Industry and Financial Markets Association publishes guidelines pertaining to the types of mortgages that are
eligible for TBA trades. Certain of our PC securities are not eligible for TBA trades, such as those backed by relief refinance
mortgages with LTV ratios greater than 105%.
Other Guarantee Commitments
In certain circumstances, we provide our guarantee of mortgage-related assets held by third parties, in exchange for a
management and guarantee fee, without our securitization of the related assets. For example, we provide long-term standby
commitments to certain of our single-family customers, which obligate us to purchase seriously delinquent loans that are
covered by those agreements. In addition, during 2010 and 2009, we issued guarantees under the TCLFP on securities backed
by HFA bonds as part of the HFA Initiative. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS —
Housing Finance Agency Initiative” for further information.
Underwriting Requirements and Quality Control Standards
We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process,
our contracts with seller/servicers describe mortgage underwriting standards and the seller/servicers represent and warrant to
us that the mortgages sold to us meet these standards. In our contracts with individual seller/servicers, we may waive or
modify selected underwriting standards. Through our delegated underwriting process, mortgage loans and the borrowers’
ability to repay the loans are evaluated using a number of critical risk characteristics, including, but not limited to, the
borrower’s credit score and credit history, the borrower’s monthly income relative to debt payments (or DTI), the original
LTV ratio, the type of mortgage product, the property type and market value, and the occupancy type of the loan. Our single-
family loans are generally underwritten with a requirement for a maximum original LTV ratio of 95% (excluding jumbo
conforming, cash-out refinance, and HARP mortgages). We prescribe maximum LTV ratio limits of 80% for cash-out
refinance loans and 90% for jumbo conforming mortgages.
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